In this guide · 9 sections
- The eight ledgers at a glance
- 1–2. Repairs, and rates and taxes
- 3–4. Payments to the auditor, and to directors
- 5–6. Employee costs, and interest
- 7. Donations, CSR and political contributions
- 8. Foreign-currency expenses and exchange differences
- What else needs its own ledger, and how to fix the year so far
- FAQs
- Sources
- Schedule III Division I asks for some expenses by nature, not by amount: repairs to buildings and to machinery, rates and taxes excluding taxes on income, the four employee benefit sub-heads, interest expense, payments to the auditor in six heads, CSR, and foreign-currency items. A single Tally ledger cannot give those figures.
- Split eight ledgers in April: repairs, rates and taxes, payments to the auditor, directors' payments, employee costs, interest and bank charges, donations / CSR / political contributions, and foreign-currency expenses.
- Several splits also feed the law outside Schedule III: section 182(3) party-wise disclosure of political contributions, section 144 on services by the auditor, section 197(16) for public companies, and the income-tax disallowances (Income-tax Act, 1961 for FY 2025-26; the Income-tax Act, 2025 from FY 2026-27).
- Para 5(viii) of the Division I instructions — CIF value of imports, expenditure in foreign currency, earnings in foreign exchange — is still in force after the 2021 amendment, so imports and foreign payments need their own ledgers.
- A split done at the voucher in April costs a minute. The same split in May of the next year means reading every voucher in a mixed ledger.
Try SignReady: Split ledgers map through their Tally groups and stay mapped next year.
Start freeMost rework on the expense notes is caused by a ledger that holds two things the notes need apart. "Repairs and maintenance" holds the factory roof and the machine overhaul. "Rates and taxes" holds municipal tax, income tax and interest on late TDS. "Professional fees" holds the statutory audit fee next to the lawyer's bill. This article lists the eight expense ledgers to split in Tally during the year, the provision that needs each split, and the note the split feeds. The full disclosure rules are in our guides to other expenses under Schedule III and employee benefits and finance costs; this one is about the ledgers. It applies to companies under Division I (Accounting Standards). Law as at November 2026. Income-tax references are to the Income-tax Act, 1961, which governs FY 2025-26 and its tax audit (Form 3CD); for entries booked from 1 April 2026 the matching provisions of the Income-tax Act, 2025 apply (TDS under sections 392 and 393, employees' contributions under section 29(1)(e), disallowances under section 34, the actual-payment rule under section 37), with its own tax audit report.
The eight ledgers at a glance
The 1% rule in para 5(i)(c) of the General Instructions for the Statement of Profit and Loss (any item above 1% of revenue from operations or ₹1,00,000, whichever is higher) can be met at year-end from ledger totals, as long as large items have their own ledgers. The splits below are different: the Schedule or another law asks for the amount by nature, so a mixed ledger cannot be fixed from its total.
| # | Split this ledger | Why (provision) | Note it feeds |
|---|---|---|---|
| 1 | Repairs and maintenance → buildings / machinery / others | Para 5(vi)(d) and (e) | Other expenses |
| 2 | Rates and taxes → rates and taxes / income tax / interest on taxes / penalties | Para 5(vi)(g) "excluding taxes on income"; ICAI Guidance Note paras 9.8.1.3–9.8.1.4 | Other expenses, finance costs, tax expense |
| 3 | Audit / professional fees → the auditor's six heads, and other professionals | Para 5(i)(j); section 144 | Payments to the auditor |
| 4 | Directors' payments → remuneration / commission / sitting fees, per director | Guidance Note para 9.5.4.1; AS 18; section 197 for public companies | Employee benefits, other expenses, related parties |
| 5 | Salaries → salaries / employer's PF and ESI / gratuity / staff welfare / PF damages | Para 5(i)(a) | Employee benefits expense |
| 6 | Interest and bank charges → interest by lender / other borrowing costs / bank charges / interest on taxes / MSME interest | Para 3 and para 5(i)(e) | Finance costs |
| 7 | Donations → charitable / political / CSR | Sections 135, 181, 182(3); paras 5(i)(k) and 5(x) | Other expenses, CSR note |
| 8 | Foreign-currency expenses → imports, foreign services, exchange differences | Para 5(viii); para 3(c) and 5(i)(i) | Foreign currency note, finance costs |
In Tally, create the new ledgers under the same parent (Indirect Expenses or Direct Expenses), or under a sub-group the client creates there, such as "Repairs". A ledger that keeps its group maps to the same line next year; see Tally groups to Schedule III mapping.
1–2. Repairs, and rates and taxes
Repairs. Para 5(vi) lists "repairs to buildings" and "repairs to machinery" as two items, to be shown separately whatever the amount. Repairs to vehicles, computers or furniture are neither, so three ledgers are needed: Repairs — buildings, Repairs — plant and machinery, Repairs — others. Bills that look like capital work (a new floor, a rebuilt motor) are best flagged when booked.
Rates and taxes. Para 5(vi)(g) excludes taxes on income. The ICAI Guidance Note on Division I says interest on a shortfall in advance income tax is a finance cost, shown separately (para 9.8.1.3), and that income-tax penalties are not current tax: compensatory ones are treated as interest, the others go to other expenses (para 9.8.1.4). Penalties also need to be visible for the disallowance of expenditure on offences (Explanation 1 to section 37(1) of the 1961 Act; section 34(2)-(3) of the 2025 Act) and the tax audit report (Form 3CD clause 21(a) for FY 2025-26). The split:
| Ledger | Holds | Lands in |
|---|---|---|
| Rates and taxes | Municipal tax, stamp duty, ROC fees, professional tax on the company | Other expenses |
| Income tax paid (advance / self-assessment / TDS) | Taxes on income | Balance sheet, against the provision for tax |
| Interest on income tax | Sections 234A/B/C (sections 423 to 425 of the 2025 Act from tax year 2026-27) | Finance costs, shown separately |
| Interest on TDS / GST | Late payment interest | Finance costs, by common practice (one policy every year) |
| Penalties and fines | Non-compensatory penalties | Other expenses; tax audit |
A worked fix. By 30 September a client's "Rates and taxes" ledger shows ₹1,92,500: municipal tax ₹62,000, ROC fees ₹7,500, professional tax ₹2,500, stamp duty on a lease ₹4,000, interest on late TDS ₹18,500, interest on last year's income tax ₹31,000 and self-assessment tax ₹67,000. One journal moves ₹49,500 to the two interest ledgers and ₹67,000 to income tax paid, leaving ₹76,000 of genuine rates and taxes (₹76,000 + ₹49,500 + ₹67,000 = ₹1,92,500). Done in October, it is one entry. In May it is a voucher-by-voucher search, and the same question for last year's comparatives.
3–4. Payments to the auditor, and to directors
The auditor. Para 5(i)(j) requires payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law matters, (d) for management services, (e) for other services and (f) for reimbursement of expenses. The Guidance Note (para 10.3) applies this to payments to the auditor's firm. Create one ledger per head that the firm actually bills — for example Auditor — statutory audit, Auditor — taxation matters, Auditor — company law matters, Auditor — certification, Auditor — out-of-pocket expenses — and keep fees to other CAs, lawyers and consultants in Legal and professional fees. There should be no management services ledger: section 144 bars the auditor from management services and the other listed services, such as accounting and internal audit. Book the fee net of GST where input tax credit is taken, and with GST where it is not, and keep that basis every year.
Directors. The Guidance Note (para 9.5.4.1) puts directors in whole-time or part-time employment inside employee benefits and keeps directors who only attend Board meetings out. So the whole-time director's salary and the non-executive director's sitting fees land in different notes. Open ledgers per director and per type: Remuneration — [director], Commission — [director], Sitting fees — [director]. The same ledgers serve:
- key management personnel compensation and other related party disclosures under AS 18 (see why every director and relative needs their own ledger);
- for a public company, the auditor's statement under section 197(16) on whether remuneration to directors is within section 197;
- TDS: salary, including commission paid to a whole-time director as part of the employment, under section 192; sitting fees and commission to other directors under section 194J(1)(ba) (section 393, Table serial 6(iii)(c) of the 2025 Act from FY 2026-27);
- GST: sitting fees and other services supplied by a director to the company are under reverse charge, while a director's salary as an employee is not a supply.
SignReady maps each ledger through its Tally group, including sub-groups the client created, and remembers your choice for the client even when a ledger is renamed, so next year starts mapped.
5–6. Employee costs, and interest
Employee costs. Para 5(i)(a) asks for (i) salaries and wages, (ii) contribution to provident and other funds, (iii) ESOP and ESPP expense and (iv) staff welfare. The Guidance Note (para 9.5.4.2) adds that penalties and similar amounts paid to statutory authorities are not "contributions". A good set of ledgers:
- Salaries and wages, Bonus, and the directors' remuneration ledgers above;
- Employer's contribution — PF, Employer's contribution — ESI, Labour welfare fund;
- Gratuity (the actuarially valued provision or the premium to the fund) and Leave encashment;
- Staff welfare — staff food, uniforms, medical — and not customer gifts, which belong in business promotion;
- PF / ESI damages and interest, kept outside the contribution line.
Keep the employees' share of PF and ESI deducted from salary in its own payable ledger, never netted with the employer's share. Under section 36(1)(va) of the 1961 Act (section 29(1)(e) of the 2025 Act from FY 2026-27) it is deductible only if deposited by the due date under the relevant Act, and the actual-payment rule does not extend that date; the tax audit report lists it deposit by deposit (Form 3CD clause 20(b) for FY 2025-26).
Interest. Para 3 classifies finance costs as interest expense, other borrowing costs and applicable exchange differences, and para 5(i)(e) asks for interest expense as additional information. Ordinary bank charges are not borrowing costs. The ledgers:
| Ledger | Lands in | Why on its own |
|---|---|---|
| Interest — term loan, interest — cash credit (one per lender) | Interest expense | Agrees with the lender's interest certificate; AS 16 capitalisation for qualifying assets |
| Interest on unsecured loans — directors / relatives / others | Interest expense | Related party note; TDS under section 194A |
| Interest to micro and small suppliers (MSMED Act, s.16) | Finance costs or other expenses, by policy | Section 23 of the MSMED Act makes it non-deductible; it must agree with the MSME interest disclosure |
| Loan processing, commitment and guarantee charges | Other borrowing costs | Guidance Note para 9.5.5 |
| Bank charges | Other expenses | Not incurred in borrowing funds |
The MSME interest ledger also makes the 43B(h) and MSMED working much easier; see MSME dues and section 43B(h).
7. Donations, CSR and political contributions
One "Donations" ledger hides three items that the law treats in three different ways:
| Ledger | Law | What the books must show |
|---|---|---|
| Donations — charitable | Section 181 | General meeting approval is needed once contributions in a year exceed 5% of average net profits of the three preceding financial years, so the running total matters. Keep 80G receipts against each entry. |
| Political contributions | Section 182 | Board resolution before payment; only by account payee cheque, draft or electronic transfer (s.182(3A)); not allowed for a Government company or a company in existence for less than three financial years; keep a running total against the 7.5% of average net profits limit. Disclosure in the profit and loss account under s.182(3). |
| CSR expenditure (with sub-ledgers for asset creation and transfers to the unspent CSR account) | Section 135; paras 5(i)(k) and 5(x) | The CSR note; ICAI recommends a separate line item "CSR expenditure" (Guidance Note para 10.13). Not deductible as business expenditure (Explanation 2 to s.37(1)). |
On section 182(3): the Supreme Court, in its electoral bonds judgment of 15 February 2024 (Association for Democratic Reforms v. Union of India, 2024 INSC 113), held unconstitutional the Finance Act, 2017 amendment to section 182(3), which had reduced the disclosure to the total amount, and also the deletion of the proviso to section 182(1) that capped contributions at 7.5% of average net profits of the three preceding financial years. The printed Act has not been amended since, but the prudent course is to follow the original provision, as reproduced in Annexure C of the Guidance Note: the total amount contributed and the name of each party, and to keep the 7.5% limit in view. A political contribution recorded as one entry in a general donations ledger gives you neither. Advertisements in a political party's souvenir or brochure are deemed contributions under section 182(2)(b), so they need the same ledger rather than "Advertisement". Contributions to the National Defence Fund are disclosed separately under section 183(2). For the CSR note itself, see CSR, crypto and undisclosed income under Schedule III.
8. Foreign-currency expenses and exchange differences
A common belief is that the 2021 amendment removed the foreign currency disclosures. For Division I it did not: para 5(viii) of the General Instructions still requires, by way of a note, the value of imports on a CIF basis (raw materials; components and spare parts; capital goods), expenditure in foreign currency on royalty, know-how, professional and consultation fees, interest and other matters, the value and percentage of imported and indigenous raw materials, spares and components consumed, dividends remitted in foreign currency, and earnings in foreign exchange. The Guidance Note (para 11.2.2) says the expenditure is disclosed in rupees on an accrual basis, as booked, not as remitted.
- Imports: separate purchase ledgers (or stock groups) for imported raw materials, imported components and spares, and imported capital goods, with freight and insurance to the Indian port tracked so the CIF value can be worked out.
- Foreign services: Professional fees — foreign, Royalty, Software subscriptions — foreign, and interest on foreign-currency loans in its own ledger.
- Exchange differences: Exchange difference — borrowings (finance costs under para 3(c), to the extent not capitalised) separate from Exchange difference — other (para 5(i)(i)).
- Earnings: export sales on an FOB basis, and other foreign-currency income, in their own revenue ledgers.
What else needs its own ledger, and how to fix the year so far
Four more items in para 5(vi) — consumption of stores and spare parts, power and fuel, rent, and insurance — need no splitting, but they must not sit inside "Factory expenses" or "Office expenses", because they are shown whatever the amount. Recurring large items such as freight outward, commission and travelling should also have their own ledgers so the 1% test is a glance at the trial balance. Our article on naming Tally ledgers for audit covers how to name them so they sort and map cleanly.
If the year is half gone, do not reopen every voucher. Create the new ledgers now, pass one reclassification journal for April to the current month per mixed ledger (as in the rates and taxes example above), and use the new ledgers from the next voucher. Then ask the client for the previous year's split of the same ledgers, because the notes need comparatives on the same basis.
Try SignReady: Draft the notes in editable Excel, then run FinalCheck.
Start freeFrequently asked questions
Which expenses must be shown separately under Schedule III Division I whatever the amount?
Para 5(vi) of the General Instructions for the Statement of Profit and Loss lists consumption of stores and spare parts, power and fuel, rent, repairs to buildings, repairs to machinery, insurance, rates and taxes (excluding taxes on income) and miscellaneous expenses. Para 5(i) adds employee benefit sub-heads, interest expense, payments to the auditor in six heads and, for companies covered by section 135, CSR expenditure.
Should repairs and maintenance be one ledger in Tally?
No. Schedule III lists repairs to buildings and repairs to machinery as separate items, so keep at least three ledgers: buildings, plant and machinery, and others such as vehicles and computers.
Where does interest on late income tax go in the accounts?
ICAI's Guidance Note on Division I treats interest on a shortfall in advance income tax as interest expense under finance costs, disclosed separately, and not as current tax. Keep it in its own ledger, not in rates and taxes or income tax.
Is disclosure of expenditure in foreign currency still required after the 2021 Schedule III amendment?
Yes, for Division I companies. Para 5(viii) of the General Instructions for the Statement of Profit and Loss still requires the CIF value of imports, expenditure in foreign currency, consumption of imported and indigenous materials and earnings in foreign exchange.
Do political contributions have to be shown party-wise?
After the Supreme Court's electoral bonds judgment of 15 February 2024 struck down the 2017 amendment to section 182(3), the prudent course is to follow the original provision: disclose in the profit and loss account the total amount contributed and the name of each party. The Court also held the removal of the 7.5% cap unconstitutional. Keep a separate ledger for political contributions.
Sources
- Companies Act, 2013 — sections 135, 144, 181, 182, 183, 197 and Schedule III, Division I, General Instructions for the Statement of Profit and Loss, paras 3 and 5 (India Code, amended text)
- Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
- ICAI — Guidance Note on Division I – Non Ind AS Schedule III (Revised January 2022), paras 6.9, 9.5.4, 9.5.5, 9.8.1, 10.3, 10.13, 11.2 and Annexure C
- Income-tax Act, 1961 — sections 36(1)(va), 37(1) Explanations 1 and 2 (applies to FY 2025-26)
- Income-tax Act, 2025 (Gazette, 21 August 2025) — sections 29(1)(e), 34, 37, 392, 393, 423 to 425 (from FY 2026-27)
- Supreme Court of India — Association for Democratic Reforms v. Union of India (electoral bonds), 15 February 2024, 2024 INSC 113
- Micro, Small and Medium Enterprises Development Act, 2006 — sections 16 and 23
- Tally Solutions — TallyPrime Help: Groups in TallyPrime
Upload the Tally trial balances: SignReady maps the ledgers through their groups and drafts the Balance Sheet, Statement of Profit and Loss and notes in editable Excel, with previous-year figures and formulas linking each note to the face. FinalCheck then flags notes that do not total. First 3 finalisations free.
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Version history: 13 Oct 2026 — first published.
